Polymerization rate may drop more with mounting stocks & shrinking cash flow

Sales of polyester filament yarn have been sluggish for half of month, and the average sales ratio lingers around 10-50% for many days. Stocks of PFY pile up rapidly, and inventory in plants that sold out before is higher, close to the level in early-Jun before price increased.

As for PET bottle chip market, after experiencing the improvement in May driven by low price, downstream buyers retreat and do not purchase after price increased in Jun.

With rising inventory in polyester plants, the major solution is to cut price and slash run rate. 

Price reduction: the decreasing speed exceeds feedstock market, narrowing cash flow

Price of PFY and PET bottle chip has declined by 770yuan/mt and 500yuan/mt respectively in Jul, offsetting half of the increment in Jun, and the decrement enlarges in recent 2 days.

With falling price but firm feedstock market, especially PTA, cash flow of polyester products shrinks, and some PET bottle chip plants and FDY units are around break-even line.

End-users cut run rate, lower feedstock inventory and slash inventory of finished goods for a period, which intensifies pressure of polyester units, so the price reduction of polyester plants has limited effect 

Currently, downstream plants witness poor orders, and the destocking is worse than expected in Jun; thus, end-users change mindset toward feedstock and finished goods inventory. Most downstream sectors concentrate on reducing stocks of finished goods and feedstock, and some scale down output, which disfavors sales of PFY in short run. Buyers’ psychological level alters in line with market tendency, so the price slash of polyester plants exerts limited influence.

O/R slash: the cut is not complete due to the difference in feedstock procurement method and inventory structure 

PET bottle chip plants and PFY units cut run rate according to 2 reasons: 1. Inventory. PFY and PET bottle chip plants witness different orders, and plants that witness high stocks and poor orders are easier to consider the devaluation pressure when price dips. 2. Feedstock. Current PTA-PX spread is high, and firm feedstock market is expected to result into high production cost of polyester plants. Thus, polyester plants that do not have sufficient feedstock inventory will slash run rate faster.

Inventory burden of polyester products is anticipated to accumulate after the delivery of earlier orders finished. The contract operation of feedstock market in Aug can be negotiable. Therefore, the overall polyester polymerization rate reduction is likely to enlarge in end-Jul and Aug when downstream demand does not improve.